Bank set to explain how to put inflation back on target

The Bank of England's governor Mervyn King raised the possibility last night that he may have to write a letter to the Chancellor explaining why the Bank has failed to keep inflation within one percentage point of its two per cent target - and what he proposes to do about it and over what time.

The Bank of England's governor Mervyn King raised the possibility last night that he may have to write a letter to the Chancellor explaining why the Bank has failed to keep inflation within one percentage point of its two per cent target - and what he proposes to do about it and over what time.

It was very surprising, he said, that such a letter has not been required in the eight years since the Bank assumed independent responsibility for interest rates.

"When the time comes," Mr King added, "I will welcome the opportunity to explain how we expect to bring inflation back to target and over what horizon.

"Such letters are an integral part of the policy framework, not an indication of failure."

Mr King spoke after National Statistics reported that sharp increases in water bills, combined with higher sewerage charges, prevented the rate of inflation from falling back last month despite the first fall in seasonal food prices in five months.

The consumer prices index, the measure of prices used for the purposes of the Bank's target rose by 1.9 per cent in the year to April, unchanged from March.

The headline retail prices index, the basis for most pensions and welfare benefits as well as pay negotiations, was also unchanged at a year-on-year 3.2 per cent.

The index used for the Bank's previous 2.5 per cent target - the RPI leaving out the effect of mortgage interest - dipped slightly to 2.3 per cent from 2.4 per cent over the year to March.

The lack of any new impetus in the overall rate of inflation should lessen any remaining fears that the Bank of England might make a pre- emptive increase in its official interest rate next month from 4.75 per cent.

But the downward drift in the cost of goods, the key to the low inflation of recent years, has come to an end.

The index number for "all goods", rose from a second month running to record a 0.2 per cent increase year on year - marginal, but still higher than at any time since April, 1999, NS said.

That increase is entirely due to energy prices, which have now risen by 11.6 per cent over the last year. Prices of fuels and lubricants rose by 4.3 per cent last month alone.

Last month's round of water bills pushed household costs up by 6.5 per cent over the year, more than in any month since records have been kept in this form since 1997.

The Bank predicted in its quarterly Inflation Report last week that inflation would move above the two per cent target in the near-term before easing back and settling close to it in 2006.